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Microsoft's Windows 7 price gamble - and why it's flawed

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Comment Microsoft is gambling it can saturate consumers with Home Premium editions of Windows 7, hoping to dislodge Apple and milk customers over the long term. But Microsoft's Windows 7 price strategy is plagued by contradiction.

On Friday, Microsoft said it's discounting the list price on Windows 7 again, this time for netbook users who upgrade to Windows 7 Home Premium.

Netbook customers running Windows 7 Starter and Home Basic can upgrade for $79.99. That's compared to Windows Vista Home Premium users who'll pay $119.99 for an upgrade. The new discounted price is part of Microsoft's Windows Anytime Upgrade (WAU).

It's the second cut to Home Premium and the latest addition to a complex matrix of discounts for consumer and business users. In June, Microsoft reduced the Windows 7 upgrade price to $119.99 from Windows Vista Home Premium's $129.99.

This latest cut is clearly a gamble that Microsoft can get netbooks users to upgrade once they find themselves using their netbook like a regular PC, running lots of applications instead of just browsing the web or checking email.

On Friday, Microsoft also confirmed earlier leaked pricing for the planned Family Pack. As The Reg already reported, the Family Pack will be priced $149.99, and it will let you install Windows 7 Home Premium on three home PCs. This is a limited time offer and will run until supplies run out.

The discounts and Family Pack should be seen in the context of recent comments and actions from Microsoft chief operating officer Kevin Turner. Turner is willing to discount prices aggressively to build market share. That was made clear in his comments to Microsoft partners and investors and through his so-called Deal Factories. Turner's mantra is that a recession breeds a great opportunity to build market share.

Dual competition

When it comes to consumer desktop and laptops in the mass market, Microsoft has two primary competitors: Apple and itself - the company behind all those machines running Windows XP and Windows Vista.

It's clear that Windows 7 Home Premium is the SKU Microsoft wants the market to standardize on. This is proven by June's discount over Windows Vista Home Premium, the cuts to drive netbook upgrades, and the Family Pack designed to saturate homes and kick out Windows XP.

When you look at raw price, you can see how Apple's OS X is the prime target: OS X retails at $129.99 for an individual copy while the Family Pack is $199.99.

At $119.99 for Windows 7 Home Premium, down from $129.99 under Windows Vista, Microsoft is going after customers who may have wobbled and gone to Apple on price. The Family Pack pushes Windows 7 Home Premium further, with a retail price of $149.99.

Apple is the target, despite Microsoft's apparent schizophrenia on the subject. Microsoft is under-cutting Apple while also minimizing the competition that Apple offers Microsoft. Chief executive Steve Ballmer this week described a WWI trench war scenario with Apple. But at the same time, he dismissed market share in this battle as no more than a "rounding error" that costs Microsoft no money.

Best not to mention the Laptop Hunters ads Microsoft's invested so much time and money in, and Turner's crowing that Apple's legal team had called him and requested he drop the Lauren ad because the Mac in question no longer exists.

"Share versus Apple, you know, we think we may have ticked up a little tick. When you get right down to it, it's a rounding error," Ballmer said.

"Apple's share change, plus or minus from ours, they took a little share a couple quarters, we took share back a couple quarters. But Apple's share globally cost us nothing. Now, hopefully, we will take share back from Apple, but you know, Apple still only sells about 10 million PCs, so it is a limited opportunity."

If it's not about market share, then what is it about? Apart from a desire to be seen as being cooler than Apple and to finally silence Apple's TV-ads, which had become an embarrassing annoyance? Ballmer told his company's Financial Analyst Meeting (FAM) this week that at last year's event he'd been repeatedly pressed on what was Microsoft's response to Apple's "I'm a Mac, I'm a PC" ads.